What are the advantages of online cloud-based accounting?

There’s a new kid in town with a lot of major advantages: online cloud-based accounting. It’s doing very well for itself because it fixes exactly what we all hate about desktop accounting software – the drudgery of manual entry and the inability to work collaboratively.

Why it solves those problems can be summed up with three new features: it’s cloud-based, it connects to the bank, and it automatically categorizes the transactions it downloads. The good products are frankly amazing.

Cloud Based

Before now old-school desktop-based software usually worked on one computer. Any sharing required extra money to get a network version (not to mention the cost of the network itself!). The most common way for small businesses to solve this problem was to put the accounting software on one computer like a laptop and then pass that computer around amongst the people who needed to use it. One day the owner might be using it to look at the financial statements, and the next day the clerk may be using it to pay bills. Then eventually the outside accountant got a copy of the data (or the computer itself) and closed the books, reconciles balance sheet, and other year end or more complex tasks. All this had to be done on one file, which as any team who’s done it knows is very difficult to share efficiently.

The cloud fixes this. Since the data is stored on a cloud server not only is it automatically backed up every day but anyone (with rights) can access it – and in fact more than one person can access it at the same time from their own computer. So the owner can be logged in and running financial reports at the same time as the staff clerk is paying bills. The outside accountant doesn’t have to come into the office or get a data file transferred to them – instead they just log into the software and see what’s happening in the company anytime they need to.

The somewhat hidden truth about accounting is that it is a very collaborative process. Desktop software never really figured out how to make this easy.

Additionally an accounting database is not much bigger than one high resolution picture so it’s very easy to work quickly with your data out on the net. You don’t have to pay a large monthly fee to support a network and a server, instead dozens of companies can easily share one accounting server, which makes cloud based accounting a bargain as well.

Thus the cloud is where accounting is going to be.

Connects to Your Bank

In addition to making accounting much more collaborative, the second great feature that better cloud-based accounting systems offer is the ability to connect to your bank and credit card companies and download the majority of your transactions for you.

This releases you from the drudgery of manual data entry. No longer is desktop software a beast that has to be fed. Most of the transactions are now already there when you log in.

Buyer beware though, only the better online accounting offerings allow you to create a connection to your bank and credit card company accounts and get that data. When you’re doing your research make sure they offer this!

When you think about it, this is pretty amazing technology. It first appeared on the scene back in 2008 when Mint dot com came out and offered this feature for personal finance. Since then this tech has moved to small business accounting so if you’re looking for new software now there’s no reason why you wouldn’t pick a service with this feature. It is a huge timesaver.

Automatic Categorization

The third benefit to the new generation of online accounting is automatic categorization. Many new users mentally link this feature with downloading transactions from your bank account, but it’s actually a very different system. While it does work with the data that the bank connection provides, this is a separate and equally complex system. Earlier versions of some desktop software (for example) downloaded transactions but they didn’t categorize them for you.

However categorization is valuable! Without it you have to visit every single transaction and categorize it yourself. You might think that downloading transactions alone would save you time, but it doesn’t. It actually takes more time to revisit existing transactions and change their category than to just key them in correctly yourself (the manual drudgery you’re trying to avoid).

Why? Because when you key transactions yourself you’re working in a chronological order. You have your source materials there and all the information you need and the extra work of keying in the vendor and the date is offset by the fact that you not looking for what a particular transaction was. We’ve even tested this, it’s not just a theory.

So remember that auto-categorization is a necessary new feature for any cloud-based accounting software, otherwise the time savings are just an empty promise. Look for it.

One BIG Caveat

However before you run out and sign up for the first online accounting package that you see, there are number of other issues to be careful about.

First as hinted above not all online accounting software offers all three key improvements over desktop software. Some are just online and offer no bank connection. Others have a very bad auto categorization system. Shop carefully.

Second, (and more important!) it turns out that auto-categorization requires an additional feature to make it work: an efficient method for reviewing the results. Auto categorization engines are getting very accurate, but they still make mistakes. Finding and fixing those mistakes is a process – that must be done. In fact, this is the new manual data entry.

There are tremendous advantages to online accounting software, but if you spend more time on your accounting than you did before then what was the point of switching? To avoid making a huge investment of time and energy and end up with something worse than you started with you MUST pick a software that offers an efficient means of reviewing the work that the auto categorization does for you. The best online accounting packages realized this and provide a means for doing so.

Be careful not to confuse the two similar causes of lost time: the first was if they weren’t categorized at all, this second one is fixing the transactions that have categorization mistakes. Even the best software will make some mistakes, being able to find and fix those quickly is now THE critical feature.

Online cloud-based accounting software has tremendous advantages for the smart user. It is the future, if you pick wisely it will save you a lot of time and trouble, and your small business will be all the better for it.